FIDIC's New Suite of Contracts - Clauses 17 to 19

FIDIC's New Suite of Contracts - Clauses 17 to 19 Risk, Responsibility, Liability, Indemnity, Insurance and Force Majeure

Nael G. Bunni, BSc, MSc, PhD, CEng, FICE, FIEI, FIStructE, FCIArb, FIAE, MConsEI. Chartered Engineer, Conciliator & Registered Chartered Arbitrator.Visiting Professor in Construction Law & Contract Administration at Trinity College Dublin.

Published in the International Construction Law Review "ICLR", Vol. 18, Part 3, July 2001.

INTRODUCTION

Part I of the excellent article by Christopher Seppala in which he explains the thinking behind Clauses 17 & 19 of FIDIC's new suite of contracts, published by ICLR1, prompts me to respond with a critique of these two clauses and must, by necessity, include the related Insurance Clause sandwiched between them. Mr. Seppala explains lucidly the changes made in the FIDIC forms, which led to the new forms and how the new Clauses 17 and 19 differ from their equivalent provisions in FIDIC's old Red, Yellow and Orange Books. In this, article I attempt to highlight the shortcomings and problems in these new clauses and outline what, in my view, should have been the text of these three clauses.

A. Clause 17 - Risk & Responsibility

1. Although this clause of FIDIC's new suite of contracts is entitled "Risk & Responsibility", it encompasses other contractual provisions, including Indemnities; Limitation of Liability; and the unrelated topic of Intellectual and Industrial Property Rights. In fact, Clause 17 starts from the wrong end of the stick by dealing first with "Indemnities" and then it somehow back tracks to deal with "Responsibility" and then takes a further leap backwards and returns to "Risk" and finally marches on to "Liability". This illogical sequence hardly helps the non-lawyer professionals for whom these provisions are intended. The clause leaves even the expert in the field wondering about the purpose of this confused and baffling sequence.

2. The theory of Risk has developed in the past twenty years or so to such an extent that it is now common knowledge that for a contract to be performed in an effective manner, the inherent risks must be allocated to the contracting parties on some logical basis, which should be made known to them. Thus, it has been said that the main purpose of a contract is to identify the principles of allocating the risks facing the contracting parties. Once these principles are identified, the consequences flow in the natural pattern of Risk to Responsibility to Liability to Indemnity to Insurance2. The format of Clause 17 should, therefore, follow that same sequence, with the insurance provisions left to the next clause, i.e. Clause 18, if it is desired that they should be presented separately.

3. Accordingly, Clause 17 ought to start with the provisions for "Risk" and

not with "Indemnities" and Sub-clause 17.3 should be 17.1. Furthermore, the wording of Subclause 17.1 should then start by explaining that the risks included under Clause 17 of the conditions of contract are only those Risks of Loss and Damage and not the whole spectrum of the risks to which the project is exposed. The term "Employer's Risks" in the context of this clause should therefore be replaced by "Employer's Risks of Loss and Damage", since these risks are confined to those which lead to some form of accidental loss or damage to physical property or personal injury, which in turn may lead to financial and/or time loss risks, directly or through the other clauses of the contract.

4. If this explanation is not given and the mistake of referring to the risks under Clause 17 as "Employer's Risks" is not corrected, then there is serious danger that the reader, and of course the user, will conclude that having identified in Clause 17 the Employer's Risks, all the other risks are the Contractors' risks, including the contractual risks in the remaining provisions of the contract. This problem can be highlighted by reference to Clause 17 of the Orange Book where the draftsman fell into that trap and stated expressly in Sub-clause 17.5 that "The Contractor's risks are all risks other than the Employer's Risks listed in Sub-Clause 17.3". This mistake has led to many instances of misunderstanding, conflict and at least one serious arbitral proceedings, where the employer pointed out that by Sub-clause 17.5 he bears no risks under the contract other than those specified in Sub-clause 17.3.

5. It is also interesting to note that, in referring to the article by Mr. Seppala, the editors of ICLR fall into the same trap in their "Introduction". They refer to the term "Employer's Risks" in Sub-clause 17.3 as the contractual risks concluding that "Part I (of the article) considers the contractual risks to be borne by contractor and employer...".3' As explained above, such a conclusion is of course incorrect.

6. Accordingly, it is essential to understand that the Employer's Risks traditionally identified under Sub-clause 20.3 of the old Red Book and those under Sub-clause 17.3 of the new suite of contracts, are only the amalgamation of risks which are beyond the control of either the contractor alone or both the contractor and the employer. Furthermore, these risks might have an implied resultant loss or damage to physical property or cause bodily injury, all of which are insurable. In contrast, very few of the other risks to which the project is exposed are insurable.

7. There are other problems in Clause 17. The second problem is the allocation of the risks specified in sub-paragraph (h) of Sub-clause 17.3 to the employer4. Whilst this does not form a departure from the old Red Book, it was hoped that the new suite of contracts would be up to date with developments in this field. The origin of this sub-paragraph goes back to the ACE Form of Contract recognisable as the route for the FIDIC Red Book. Whilst it is true that the contractor has no control over the events

identified in this sub-paragraph, he is in control over their consequences and can instigate protection measures. The contractor can also mitigate any losses that might occur should any of these risks eventuate. Perhaps, more importantly, all the risks identified in sub-paragraph (h) represent events that are insurable and are generally required to be insured under the terms of the contract. The employer ultimately pays for such insurance through the contract provisions leaving the contractor in charge of any necessary repair, its cost and any claim negotiations with the Insurers following the filing of such claims. These risks are not included as Employer's Risks in the ICE domestic contract or the others rooted in it5.

8. The third problem in Clause 17 of the new suite of contracts is the newly introduced restriction in Sub-clause 17.1(b)(ii) of the contractor's indemnity to the employer for property damage. This indemnity is now based on negligence rather than on legal liability as was provided in Clause 22.1 of the old Red Book.6 This change is a retrograde step and copied from standard forms of contract for Building Works in the UK 7 without any benefit to either the contractor or the employer. The only beneficiary as a result of this change is the insurance market since to cover this gap a new policy is now needed, which is commonly referred to in the UK as the non-negligence insurance policy. As Mr. Seppala explains in his article, it seems that in making this change, the draftsmen of Clause 17 of the new suite of contracts took comfort from a footnote in Hudson's Building and Engineering Contracts (1995), Vol. II, page 1437, where reference is made to both the RIBA and the ICE forms of contract. The reference to the ICE form of contract in that footnote is incorrect since civil engineering contracts do not distinguish between the indemnity required to be given by the contractor for property damage on one hand and that for bodily injury, disease or death of any person on the other. In fact, the standard forms of contract for civil engineering construction in the UK or elsewhere do not impose the restriction now introduced.8

9. The last major problem in Clause 17 relates to the allocation to the contractor of the risk of "use or occupation by the employer of any part of the Permanent Works" in the EPC Form of contract. The reasoning for such allocation is extremely obscure since such use or occupation by the employer of any part of the Permanent Works cannot be within the control of the contractor and thus it is not a risk that could be assessed or against which some preventative measure could be taken.

10. Finally, there are some minor problems of drafting in Clause 17, which should be addressed for the proper understanding of what is intended by such a clause. For example, Sub-clause 17.2 is a "Responsibility" clause; Sub-clause 17.5 is a "Risk" clause; and accordingly they should be designated as such. Another example is the need for there to be a statement as to proportional apportionment of indemnities when both employer and contractor have contributed to damage, loss or bodily injury. This would be particularly important where an indemnity clause is strictly interpreted under the applicable law of contract.9

B. Clause 18 -Insurance

11. Whilst there was no commentary provided by Mr. Seppala on Clause 18 of FIDIC's new suite of contracts, it is important to include one here, since, as explained earlier, insurance is the last of the contractual provisions in the chain of Risk; Responsibility; Liability; Indemnity; and Insurance.

12. The first major problem in this Clause is the fact that the "Insuring Party", as defined in the contract, is not the same for all the insurance policies required under the contract and it may be either of the two parties, employer or contractor. This is a recipe for confusion, gaps and/or overlaps in the combined insurance package, which could cost the parties dearly. It could only be advantageous to those involved in the insurance market.

13. The second paragraph of Clause 18 assumes that there would be a meeting between the parties prior to the date of the Letter of Acceptance at which the whole insurance package would be discussed and agreement would be reached on a policy towards insurance, which would "take precedence over the provisions of (Clause IS)". It remains to be seen as to how this provision would operate in practice and the effect it would have.

14. There are many drafting ambiguities in this Clause, which should be clarified if the contract is to be operated successfully. Examples are:

Sub-clause 18.1 provides that "Wherever the Employer is the insuring Party, each insurance shall be effected with insurers and in terms consistent with the details annexed to the Particular Conditions". 10 What is intended by the term "details"? If, as stated, these details are expected to furnish the terms of the insurances supplied by the employer, then surely this must mean that nothing less explicit than the policies of insurance themselves have to be annexed.

Sub-clause 18.1 provides that "When each premium is paid, the insuring Party shall submit evidence of payment to the other Party .... ". 11 This wording does not provide the intended meaning. Payment of each insurance premium should be made to initiate or maintain the insurance cover and evidence should be provided whenever required.

Sub-clause 18.2(d) specifies the deductibles to be applied to the insurance cover for some of the Employer's risks. Should the insurance cover for the Contractor's risks be subject to no deductibles?

What is the meaning of "insurable at commercially reasonable terms" in Sub-clause 18.2(d); in the last paragraph of Sub-clause 18.2; and in Sub-clause 18.3(d)(iii)?

C. Clause 19 - Force Majeure

15. As observed by Mr. Seppala, a force majeure clause is an increasingly common feature of international contracts. It is the fashion, but is it necessary or even desirable? For FIDIC, I suspect that importing force majeure from the old Yellow and Orange Books into the new suite of contracts was a desire to show a closer position to the civil law concepts and a move away from the common law principles. If the truth be told, such a move in the context of "force majeure" is neither necessary nor desirable because:

Firstly, incorporating a clause such as Clause 19 into a contract not only duplicates what is usually provided for in the civil code of a civil law jurisdiction, but also enlarges the scope of the meaning and application of force majeure. This could result in the Parties getting into a muddle and a contradictory situation;

Secondly, the original concept of the Special Risks in Clause 65 of the old Red Book is all the protection that the contractor needs;

Thirdly, most of the risks, which now come under the FIDIC definition of force majeure, are insurable and required to be insured. Therefore, no real benefit accrues to the contractor from being protected by such a clause without having to slip into uncharted waters.

16. Therefore, whilst it must be agreed that the treatment of the risks specified in Clause 19 should be a special one, it is erroneous to swing to the extreme end of the scale and designate them in the category of false majeure, particularly when that tem has legal implications in certain jurisdictions. The answer for the purposes of these conditions of contract should to designate as what they are, i.e. an exceptional set of risks with different treatment to that given to the normal set of risks to which the project is exposed.

D. The solution

17. It is unwise to criticise without offering a reasonable alternative. Therefore, attached herewith is a replacement offer to Clauses 17 to 19 of the new Red Book of FIDIC. The new Yellow Book and the Silver Book require some modification to suit the risks shifted from the employer to the contractor and in particular the design risk.

E. The Replacement for Clauses 17 to 19 of the New Red Book 12, 13

17 RISK AND RESPONSIBILITY

Employer's Risks of Loss & Damage

17.1 The risks of loss and damage to the Works, Goods or Contractor's

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download